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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA -- Ignore unavailable to you. Want to Upgrade?

To: High-Tech East who wrote (15028)	11/7/2002 2:23:56 PM
From: High-Tech East	Respond to of 19219

US Treasury curve flattened as bulls challenge Fed - November 7, 2002, 12:47pm ET By Wayne Cole NEW YORK, Nov 7 (Reuters) - Longer-dated U.S. Treasury prices surged Thursday as investors took a steamroller to the yield curve in a resounding sign that few shared the Fed's confidence in economic recovery. The new 10-year note climbed a point, richly rewarding those who risked buying in Wednesday's $18 billion auction, while the 30-year jumped more than two points. The massive rally reflected market skepticism of Fed claims that Wednesday's aggressive half-point rate cut was just a fillip to get the economy through a "soft spot. And analysts had real problems with the Fed's baffling shift to a balanced view on the economy, a heavy hint it was not inclined to ease policy again. "I find it hard to take confidence in a now neutral policy bias," said Stephen Roach, managing director and chief economist at Morgan Stanley. "This aspect of the Fed's latest action was pure spin." "It may well be wrong to conclude this action will be the silver bullet that sparks cyclical recovery and eliminates deflationary risk. I suspect we'll be disappointed and the Fed will have to change its mind," he added. The Fed's shift to a balanced view did put a floor under the interest-rate sensitive two-year note yield, at least for the short term. But that just sent investors piling into longer dated maturities, leading to a bullish flattening of the yield curve -- so called because long yields are falling while the short end stays roughly steady. The trend was given added impetus since until recently investors have been betting the curve would steepen, buying short-dated debt and selling the long end, and were now rushing to unwind these positions. "The Fed's operating a stop-go policy," said Dominic Konstam, head of interest rate strategy at Credit Suisse First Boston. "At every cut they act like it's the last, so the market has to push them until they ease again." The Fed did much the same back in 1992, he noted, drip feeding the market cuts in April, July and September. "And the market will push. The economic fundamentals are still very weak and there's no recovery in sight, which is why we're getting this bullish flattening," he added. Thus while two-year yields nudged up to 1.84 percent from 1.83 percent, the five-year fell to 2.89 percent from 3.01 percent and the 10-year to 3.90 percent from 4.03 percent. In the long end, the 30-year yield sank to 4.92 percent from 5.06 percent, shrinking the gap over the two-year to 308 basis points when just a fortnight ago it hit a decade high of 331 basis points. Treasuries were also aided by uncertainty in the equity market were the major indices (INDEX:$INDU)(INDEX:$SPX.X) were dragged lower by a cautious outlook from tech giant Cisco (NASDAQ:CSCO). There was some disappointment the European Central Bank and the Bank of England had kept rates steady at their policy meetings, defying intense pressure to follow the Fed's lead. But bond bulls can find a positive in anything and argued the lack of a concerted easing likely condemned the world to slower economic growth than otherwise. BACK TO BASICS With the Fed excitement over and now scant chance of a policy move for the rest of the year, the market returns to the more prosaic task of data watching. Weekly jobless claims dipped by a little more than expected to 390,000 from 410,000 the week before, but this series has been so volatile recently the market tends to discount it. Also out was third quarter productivity which surged by 4.0 percent annualized after a 1.7 percent gain the quarter before. Year-on-year it was up an even more impressive 5.3 percent. Analysts were surprised at the strength of wages in the data, with annual hourly earnings up 4.8 percent, but noted unit labor costs were still down 2.0 percent. Indeed, the price deflator in the series was up just 0.2 percent annualized against 1.4 percent in the second quarter. While high productivity is usually hailed as a boon for profits and inflation, it also means companies are squeezing more out of their labor force rather than taking on new hires. And fierce global competition means much of the gains from productivity go to cutting prices rather than fattening the bottom line, adding to deflationary pressures in the traded goods sector. That could be one reason why corporate profits as a share of GDP fell sharply in the late 1990s to hit a record low in 2001 even while the productivity miracle was supposed to be working wonders. finance.lycos.com